Peace of Mind to Enjoy Your Retirement

Major changes came into effect in April 2015 regarding how the public can access their personal pension policies, the principal one being the flexibility to shape future income streams to suit your own particular circumstances. There is no longer the need to purchase an annuity on retirement and be tied to a set income. Instead, the level of income enjoyed can be increased during the early stages of retirement and scaled back in later years, for example when the State Pension kicks in, one off "ad hoc" withdrawals can be made to fund specific projects - e.g. that holiday of a lifetime, your child's wedding. The only stipulation is that there must be sufficient funds in your pension pot to fund the withdrawals.

It is essential, therefore, that you maintain regular reviews with your Financial Adviser to ensure that you don't run down your pension pot too soon.

Another area of pension planning which has come to the fore over the past 12 months, or thereabouts, is the option to transfer deferred benefits from "frozen" Final Salary pension schemes accrued during previous employment. The transfer values which have been quoted by the scheme trustees have risen markedly which has made the option of transferring these benefits to a personal pension environment much more attractive. The average figure at the moment is circa 22 times the accrued benefit - i.e. if the accrued pension benefit at time of leaving your previous employment was £10,000 then the Cash Equivalent Transfer Value (CETV) could be £220,000 or more.

The most common rationale behind looking at transferring any deferred benefits is (a) the ability to access these benefits early - i.e. from age 55, (b) the flexibility to shape income withdrawals to suit your own needs and timescale, and (c) the death benefits attached to personal pensions.

Death Benefits:

A "normal" Final Salary pension scheme package will include a "spouse's" benefit of 50% of the scheme member's pension payable as at date of death. Once both the scheme member and the spouse have died, all benefits from the pension scheme cease, whether this is 5 years or 55 years after payment of the benefits begin.

With a personal pension, however, the changes made in April 2015 allowed a greater degree of flexibility in the treatment of death benefits. The key question became "What was the member's age at date of death" as this determines the tax treatment of the benefits payable. This is detailed below:

Member's age at date of death Options and taxation at date of death
Pre age 75

  • Take the whole fund as a tax free lump sum.
  • Take income via a drawdown facility on a tax-free basis.
  • Purchase an annuity - income is tax free.
Age 75 or over
  • Take the whole fund as a lump sum.
  • Take income, either via an annuity or drawdown

  • (both options taxed at the beneficiary's marginal rate)

A key benefit which was brought in when introducing the recent changes was the ability to pass any unused pension funds down through the generations. The new rules allow the nominated beneficiary to pass any unused drawdown allowance (i.e. balance of fund remaining) to their own nominated beneficiary, without the fund ever falling into anyone's estate for IHT purposes. The tax treatment is the same as noted above but the relevant age will be the age of the beneficiary rather than the original member.

In effect, this means that, on your death, your spouse can continue receiving an income at the same level, rather than being forced to take a 50% wage cut. In addition, if there is any balance remaining in the pension fund when you both die, this can be passed down for your children to enjoy.

There is no automatic right or wrong decision regarding defined benefit transfers as each case is different and each individual has their own unique wants and needs. Our advice? Ask the scheme trustees for a Cash Equivalent Transfer Value (CETV), seek appropriate professional advice and then make a decision. Without the facts it is only guesswork and, surely, your future is too important to be left to chance.